This Money Mistake Is 'Recipe for Financial Disaster,' According to Dave Ramsey

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  • Dave Ramsey is a personal finance expert, offering people advice on paying down debt and building wealth.
  • He's issued a stern warning against a major money mistake: spending your cash without planning for it in advance.

Could you be putting your financial security at risk?

Dave Ramsey is a financial expert who has offered advice on a wide range of issues ranging from what type of investment account you should use to how much house you can afford.

While not all of Ramsey's advice is worth following, he does have an important warning you should heed about a money mistake that could have devastating consequences. Here's what it is.

Are you at risk of financial ruin?

According to the Ramsey Solutions blog, one of the biggest money mistakes you could make is to spend your cash without deciding in advance what you'll do with it.

"You won't get ahead if you don't have a plan for your money," Ramsey said. "Instead, you'll find yourself wondering where your money went at the end of every month! That's not financial independence -- that's a recipe for financial disaster."

Ramsey goes on to explain that "Financial freedom is impossible if you're not living on a budget" because "you've got to tell your money where to go, or you'll end up wondering where it went."

He urges using a zero-based budget in which you allocate every dollar to a specific purpose and then tracking your spending to make sure you're using your money according to your pre-set plan. He also suggests making your budget every single month to ensure you're addressing the upcoming expenses you face.

Ramsey believes this is important regardless of how much you make, because otherwise it's far too easy to spend your money on things that don't actually help you improve your financial situation in the long run.

Should you listen to Ramsey's advice?

While budgeting may not be your idea of a good time, the reality is that Ramsey is pretty much spot-on with his warning that spending your money with no plan usually doesn't lead to prosperity.

Even if you earn a lot, it's far too easy to give into impulse buys or to spend on fun purchases and not set aside enough for the future. You may not even realize how much money you "waste" if you don't know where your cash is going, and you may not get as much value out of your hard-earned dollars if you don't allocate them with purpose.

You don't necessarily have to follow Ramsey's preferred budgeting approach and create a rigid list of all of your spending needs to allocate each dollar you earn though -- especially if you find this process to be tedious and think making up a detailed budget every month sounds like a nightmare.

In fact, trying to be so rigid about your budget could make it more likely you give up and just keep spending without a plan since creating a detailed budget isn't fun for most people. While you can try out this technique, if it doesn't work for you, don't be afraid to consider alternatives like a simplified 50/30/20 budget. That type of budget just requires you to save 20%, keep your fixed expenses to 50%, and then spend the remaining 30% on discretionary costs.

While your budgeting approach may differ from Ramsey's recommendation, you should heed his advice and make some kind of budget or plan. Otherwise, as he said, you could be on the fast-track to financial disaster.

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